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The last few years has shone a glaring spotlight on the UK audit profession.
External stakeholders – from politicians and the media to regulators, industry bodies and investors – have been increasingly questioning the purpose and role of auditors in light of headlines concerning business failures, fraud, and the ongoing perception that auditors’ independence is clouded by conflicts of interest.
Whether you agree or disagree with those headlines, the debate over the past two years shows that change is needed, and now is the time to make it. And the widespread disruption caused by COVID-19 has only exacerbated this urgency. As I recently wrote in the Telegraph’s comment section, we believe it should be a catalyst for pushing on with, not waiting for, much needed reform.
Over the course of the coming months, this blog will set out Deloitte’s position in relation to the UK audit debate. My colleagues and I will provide some insights on the main themes, our take on specific proposals for reform, tackle some of the misperceptions around audit and outline where the product of the future should take us.
Among those topics, we’ll look at what was learnt from how audits were (and still are) being conducted amid the pandemic, unpick the debate around non-audit services, explain how we will achieve operational separation, ask what role auditors can play in measuring climate change, and demonstrate how we think technology can transform audit for the better.
Please do sign up here to follow this in more detail and for our take on the different components of this debate. We’ll kick off the series next month.
The current situation
At the time of writing, all of the announced reviews and consultations into the sector – including those by Sir John Kingman, the Competition and Markets Authority (CMA) and Sir Donald Brydon – are complete. We’ll look at each of these and the recommendations they make in future articles.
In March, Parliament’s BEIS Select Committee also launched an inquiry – following on from their report last year – which we will be contributing to shortly.
The remainder of the reviews now await further consultation but reform of audit was in both the Conservative Party manifesto and latest Queen’s Speech, so there is appetite within government to move ahead too.
Then of course came COVID-19. While the disruption caused by the pandemic has unsurprisingly slowed the pace of legislative and regulatory reform in recent months, we still expect this to progress and ramp up as we head into the remainder of 2020, and beyond.
Regulator ramps up
Meanwhile, the audit regulator – the Financial Reporting Council (FRC) – continues to transition into the Audit, Reporting and Governance Authority (ARGA), as recommended by Kingman. It continues to drive the reform agenda forward and has been actively engaging with the industry to understand what changes can be made without legislation.
One important step here was the recent announcement on the FRC’s principles for operational separation of the audit practices of the Big Four firms. We welcomed this clarity and will continue working with the FRC to develop our plans over the coming months.
However as we said at the time, this must also be considered alongside a wider package of reform. This includes in vital areas such as corporate reporting, the role of directors and the regulatory environment in which we operate.
We’ve been consistent in our support for reform. We remain committed to playing our role in delivering change that embraces audit quality, improves choice and restores trust. We want to use this opportunity to bring about change that improves not just audit quality but the effectiveness of the whole corporate governance system.
At this stage in the debate, our biggest concern is the pace of reform. We acknowledge that change is needed urgently and this requires all players in the market to step up.
While it’s not going to be easy for a profession that roots itself in taking time and consideration, many areas do not need to wait for regulatory or legislative prompting – which could take several more years. If the dial does not shift, a tremendous opportunity will be missed.
Ultimately, I remain optimistic that an outcome can be reached that will go further towards meeting society’s expectations of the industry in the years ahead. And more than anything, I hope that in years to come we don’t look back at one of the 2018-19 reports and be struck once again by how familiar it all still seems.
The bottom line
The guiding principle for our firm has always been that any changes introduced must enhance audit quality. Where we see that certain solutions could endanger this, we have put forward practicable alternatives. Again, we will use this forum to set some of these out in further detail.
We have also been resolute in our position about the unintended consequences of certain changes, and stressed that reforms must be proportionate, and avoid damaging the reputation of the UK as a leading capital market and its position in the global economy – particularly as we try to emerge from the pandemic and the UK repositions itself after leaving the EU.
Businesses, regulators and governments around the world are watching the UK debate closely, so there is an opportunity to bring in reforms that set a lead for others around the globe to follow.
Stephen leads business performance and public policy for Deloitte UK, leading on all operational matters. This includes overseeing operational separation as part of wider audit market reforms. Alongside these responsibilities, he is a senior audit partner specialising in leading large public company audits and transaction projects across a broad range of industry sectors. Prior to his appointment to UK Managing Partner, Stephen held a number of high profile leadership roles. These include UK CFO, Audit Talent Partner and most recently, Managing Partner of our Audit & Assurance practice for Deloitte UK and Deloitte North and South Europe.